Question

The Company earns a net profit of Rs. 1,05,000 with a capital
of Rs. 7,00,000. The NRR is 15% Under capitalization of super
profit goodwill will be -​

Answer 1

Answer:

Capitalisation method of valuing goodwill:

Under this method, value of whole business id determined by applying normal rate of return. If such value (arrived at by applying normal rate of return) is higher than the capital employed in the business, then the difference is goodwill.

Calculation of goodwill under capitalisation method is:

Goodwill = (Average profit/ Normal rate of return) - Capital employed

Goodwill = Rs. (50000/ 20%) - Rs. 150000

Goodwill = Rs. 250000 - Rs 150000

Goodwill = Rs. 100000

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